Mayor Barry matched his upbeat budget proposal for the city yesterday with an equally glowing "State of the District" report. Make the quadrennial allowance for political bragging: both the budget and the mayor's view of the city do reflect a relatively healthy local economy. Various agency heads and D.C. Council members will find fault with specific dollar amounts proposed by the mayor, and the full effect of forthcoming federal budget cuts is still to be felt. Still, Mr. Barry's assessments of the city's finances and potential in the coming fiscal year are plausible as well as encouraging.

Campaign years are not generally noted for tax increases, and there is none proposed in Mr. Barry's budget. But neither is there good reason for one thisear. In fact, arguments could be made for adjusting the D.C. income-tax structure to bring some relief for lower-income taxpayers. But the impact of federal cuts is too uncertain to make that effort this year.

For now, with economic growth still generating increases in revenues -- though at a slowing pace -- there is room and cause to focus on improvements in social services, the public schools and the corrections system. That's what Mayor Barry is seeking. Increases in payments under Aid to Families with Dependent Children, for example, are called for. There are proposals to relieve overcrowding in correctional facilities pending construction of a new prison. Money is directed to housing and jobs programs, including an ambitious effort to find a summer job for every District youth who wants and seeks one.

Above all, Mr. Barry's budget as well as his speech yesterday call for dramatic capital improvements in the schools. Repairs are desperately needed, and those proposed include replacing 34 school roofs, seven boilers, windows at 49 schools and doors at 28 schools, overhauling eight schools' electrical systems, and removing asbestos from all buildings.

While school officials are generally pleased with the mayor's capital improvement proposal, they will seek more than he is requesting for other school programs. Class sizes still are too large, and coaches, librarians, clerks, aides and supplies are short. Between now and final approval of a budget, officials should negotiate a budget figure closer to what school officials need to ensure continued progress in the city's classrooms.